A new global model is emerging for pensions: investing in passive funds and shifting towards lower-risk assets as savers age. That was the clear picture that emerged from the global pensions conference run by asset management trade association ICI Global in Geneva last week.

It may come as no surprise to observers of the UK system where these are well-established trends – but it means big changes elsewhere. One market in transition is Australia, a country usually cited as being at the cutting edge of pension reform. Since introducing compulsory savings almost 25 years ago, Australian pension assets have swelled to A$1.6 trillion ($1.5 trillion), or almost as much as the country’s gross domestic product.

But according to Nick Callil, Australian head of post-retirement solutions at pensions consultancy Towers Watson, only about 14% of this money is invested in “true” life-cycle funds, which shift a member’s money as they age. The amount is growing, however – in 2009 it was only 5%.

In the UK, according to market researchers Spence Johnson, over 90% of large defined contribution pension plans use them.

Richard Gröttheim, chief executive of Swedish national pension fund AP7, said his fund had been directed by the government to shift its investment strategy to a life-cycle approach known as “Safa” four years ago. And Stephen Utkus, head of the Center for Retirement Research at US asset-manager Vanguard, said US plans had moved “massively” in the past 10 years away from a system of individually selected funds to the widespread use of default funds run according to the “target date” strategy.

Under life-cycle investing, young savers with decades of saving ahead of them have their pension pot largely in equities to get maximum returns. As they age, life-cycle funds shift this into safer, lower-return assets so that when they cash out their pension it is not affected by short-term market swings.

Target date funds also move money into lower-risk assets as members age, but do so even more actively than life-cycle approaches. In the US, assets invested in target date funds have gone from nothing in 1993 to $850 billion today.

Utkus said: “10 years ago, any default fund you looked at was cash. Today, 85% of [defined contribution] plans offer a target date fund, and for 95% of those that have a default fund, it’s a target date fund.”

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Grottheim said he thought the concept had acquired a global momentum. He said: “I am even more convinced, after having listened to the presentations today, that age-based allocation plans are a trend, and a good and realistic trend.”

In the US, although most target date fund managers move money between broad asset classes, such as between equities and bonds, Utkus said their popularity implied a move away from active fund managers who pick stocks within asset classes. He said: “Our estimate is that nearly one half of all assets in target date funds are now passive. The existing 401(k) strategy is only 20% passive.”

But speakers all agreed that defined contribution plans were mostly struggling to invest illiquid and alternative assets.

Unlike old-style defined benefit or final salary schemes, which promise guaranteed pensions to workers and leave the management of assets to professionals, defined contribution schemes expect members to take responsibility for their own investment fund choices. In order to make switching between funds available, they can only invest in liquid assets in case members want to pull out their cash.

Jaime de la Barra, a founding partner at Chilean asset manager Compass Group, said that the six giant DC pension funds in his country had effectively become “giant daily liquidity mutual funds” which only invested in “very liquid equities or mainstream bonds”.

He said: “This means you are giving up the illiquidity premium [the notional extra returns given to investors as a reward for investing in illiquid assets], and it also means you are giving up something else that in my view is very important – the opportunity to invest in things that would ‘validate’ the pension system, such as road building through infrastructure funds, or investing in entrepreneurship through private equity.”

Funds in the UK face the same difficulty, and consultants have warned that private equity or infrastructure managers hoping to win business from defined contribution funds might be disappointed, especially as older defined benefit funds go into run-off in the years ahead.

But Callil of Towers Watson said Australia’s defined contribution pension funds had become an exception to this rule. “Unlike funds elsewhere, Australian funds have a meaningful allocation to illiquid property and infrastructure assets.

“We face the same difficulties in holding these assets as funds elsewhere – but the funds have got around this largely through judicious modelling [of likely withdrawals] and only doing what is realistic. Even during the financial crisis, there was only one fund that got into trouble because of a highly illiquid strategy – but largely the system coped with it.”

This article was first published in the print edition of Financial News dated June 23, 2014